Credits Where Credits Due
SR&ED Tax Credits - Are You Getting Yours?

The Canada Revenue Agency (CRA - formerly CCRA - formerly Revenue Canada) has a problem.  Canada has one of the most generous tax credit programs in the world, the Scientific Research and Experimental Development Tax Credit Program (SR&ED.)  However, many eligible taxpayers, particularly manufacturers, are not taking advantage of the program.  At a recent session held by the CRA, they expressed concern that less than 50% of eligible Ontario manufacturers are filing SR&ED claims.  This is a surprising situation, particularly given the various financial strains, including the strong Canadian dollar, that many manufacturers face today. There are numerous explanations for this, but it is likely due to the common view that the program applies to the high-technology sector exclusively.  This is simply not the case.  The program is designed to support scientific research and, more to the point, experimental development, in all sectors.

The SR&ED Program

The SR&ED program can provide a powerful competitive advantage.  Eligible taxpayers can receive a tax credit of up to $68 for every $100 of eligible labour costs.  In general, to be eligible, a company needs to be attempting to advance its knowledge in its field of technology.  It would be difficult to name a successful manufacturer that doesn’t do this on a daily basis.  Some of the indicators of eligible SR&ED activities are attempts by companies to make their products and processes faster, cheaper, stronger or more durable.  The development of prototypes and work performed to reduce high scrap rates are also common indicators of SR&ED.

Historically, the program has had its difficulties.  In the early 1990’s the general impression of the program was that the CRA wanted to put up barriers to reduce the number of claimants.  This has changed.  The CRA is making strong efforts to reach all eligible taxpayers, and is striving to make the whole process as painless as possible.

Eligibility Criteria

To be eligible, a company must show that it made, or attempted to make, a technological advancement, and that it faced technological uncertainty.  The technical advancement does not need to be ground breaking.  Incremental improvements in a company’s products or processes are eligible.  The advancement is viewed in light of the company’s base level of knowledge, which is expected to include knowledge generally available to the public, but not proprietary knowledge of competitors.  Technological uncertainty is evident when a company is facing a problem it does not know how to solve at the outset of a project.  The criteria is met whether it is uncertain if the problem can be solved at all, within certain tolerances, or within cost limitations.

Calculation of the Credit

The tax credit is based upon eligible expenditures.  Eligible expenditures include labour, materials, subcontract costs, certain capital items and overhead related to the development activities.  The rules around eligible expenditures can be complex and it is important to understand them fully to ensure all eligible costs are captured.

The CRA’s tax credit is calculated at either 20% or 35% of eligible expenditures.  In general, the 35% rate applies to the first $2 million of eligible expenditures incurred by Canadian Controlled Private Corporations (CCPCs.)  The 20% rate applies in other cases.  Tax credits earned at the 35% rate are fully refundable.  If no taxes are payable, the CRA will issue a refund cheque.  Tax credits earned at the 20% rate, in general, are not refundable, but can be used to offset taxes payable.  In addition, the Ontario Ministry of Finance offers a 10%, refundable credit to smaller private and public companies in Ontario.

The Filing Process

The claim for SR&ED tax credits is filed with a company’s tax return and includes form T661 and project narratives.  Form T661 summarizes eligible expenditures.  For each development project claimed, a 3 to 4 page narrative must be prepared explaining the work done in the year and how the project meets the program criteria. 

There is certain documentation required to be kept by the company to support the claim.  The documentation should demonstrate that the company actually did what it said in the narratives, and support the eligible expenditures.  In evaluating and developing documentation, it is important to remember that CRA views the SR&ED program as an incentive program.  They are not out to make life difficult, but need to be able to determine that the amounts included in the claim are reasonable.

Summary

The SR&ED program is a tremendous incentive, and a key part of the federal government’s innovation strategy.  While most companies in the high-technology sector seem to have taken advantage of the program, it is apparent that many manufacturing firms have not.   CRA has a strong desire to reach all eligible taxpayers.  The word needs to get out.

This article was contributed by:

Rob Lamka is Senior Manager, Tax at the Kitchener office of Deloitte & Touche LLP.  
 


Rob Lamka
Deloitte & Touche LLP
700 - 55 King St W
Kitchener, ON  N2G 4W1
Telephone: (519) 585-3806
rlamka@deloitte.ca
www.deloitte.ca